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2011 global private equity report


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2011 global private equity report

  1. 1. GLOBAL PRIVATE EQUITY REPORT 2011A force for growth
  2. 2. Contents01 Key findings04 Global picture15 Western Europe24 North America33 Asia Pac41 MENA50 BRICS62 Sample and methodology64 Grant Thornton capabilitiesIBC Grant Thornton contacts Glossary AFIC Association Française des Investisseurs en Capital (the French Private Equity Association) AIFMD Alternative Investment Fund Managers Directive Asia Pac Asia Pacific region BRICS Brazil, Russia, India, China and South Africa CEO Chief Executive Officer DD Due diligence ESG Environmental, social and governance FMCG Fast moving consumer goods GCC Gulf Cooperation Council GDP Gross domestic product GP General partner HR Human resources ILPA The Institutional Limited Partners Association IPO Initial public offering IR Investor relations IT Information technology LATAM Latin America LP Limited partner M&A Mergers and acquisitions MENA Middle East and North Africa (including Turkey) N/A Not applicable PE Private equity PIPE Private investment in public equity PLC Public limited company SME Small and medium sized enterprises SWF Sovereign wealth fund TMT Telecommunications, media and technology UN PRI The United Nations-backed Principles for Responsible Investment InitiativeThe views and opinions in this report expressed by those private equity survey respondents providing comments or quotesare theirs alone, and do not necessarily reflect the views and opinions of Grant Thornton International Ltd or any of itsmember firms.
  3. 3. Key findings MARTIN GODDARD GLOBAL SERVICE LINE LEADER – TRANSACTIONS GRANT THORNTON INTERNATIONALOver recent years, practitioners Three years in, the answer to the Three years ago, as the cloudswithin the private equity industry question of whether we are emerging gathered with the tightening of themight have been forgiven for thinking from the global economic downturn debt markets, dealflow within thethey were facing something of a or about to slip into a double-dip is more developed private equityperfect storm, with the industry being still to be answered. markets rapidly started to fall away.challenged on all sides. Globally, the Through this, private equity has With the skies not having lightenedcompetitive environment within the been asked to reflect on both its own that much in the intervening period,industry has become more intense place in the financial landscape and to the consequent increased competitionwith quality dealflow at a premium, face up to its often compromised for quality deals has only beenwhile simultaneously Limited public perception. There are real compounded by the return of strategicPartners (LPs) have become challenges here for the industry world- buyers, many of them keen to putincreasingly demanding and vocal, and wide. In this report, we consider what healthy balance sheets to work.the industry has also received greater it means to undertake private equity in In the emerging markets, the sense ofscrutiny from the broader public and the principal private equity markets opportunity has seen something of aregulators alike. Compounding the around the globe – in terms of both gold rush mentality with an influx ofindustry’s own internal growing pains the challenges and opportunities – and Western private equity firms seeking– which in some of the oldest private find an industry that, on many levels, new areas of opportunity and theequity markets has seen the validity of is converging in terms of the way it rapid development of domestic privatethe whole model questioned – has goes about business. However, while equity industries also drivingbeen one of the toughest macro operating a private equity firm in competition. Across the world, then,economic environments in recent London, Sao Paulo, New York, there has been a shortage of qualityhistory, with portfolio companies Shanghai or Sydney may require assets at reasonable prices for a privatesucking in time and resource as they increasingly similar skills, functions equity industry which had beenface up to the economic headwinds. and approaches, the dynamics in those accelerating its accumulation of funds individual markets driving this over the course of the previous decade convergence often remain quite and, as a consequence, has a pent up different. need to deploy capital. Global private equity report 2011 1
  4. 4. Just finding shelter and sitting out inevitable concern. However, in these Historically, IPOs have often been the storm hasn’t been an option for markets too, private equity firms a preferred exit route for private private equity investors either. With report the growing relevance of equity firms, and they do remain a the boom in investment activity in the added-value approaches to portfolio viable option in parts of Asia, for run up to the downturn, private management. These markets are often example. However, this channel has equity portfolios had grown still characterised by growth capital been all but closed for some time in considerably and have often been investments, with low levels of Europe and the USA; overall public demanding of attention as the leverage, meaning the focus too is on investor sentiment and desire to invest environment has become more performance improvement. As these might be the issue in some regions, challenging and unpredictable. markets become more globalised, but the perception of private equity Creating ‘saleable’ businesses with there is a recognition of the need to has also acted as a particular brake on enhanced valuations is the endgame ‘professionalise’ businesses, with the IPO option in some countries for private equity firms and, while the private equity firms seeing a key largely due to perceived pricing issues. exit markets are showing some signs aspect of their involvement as the The return of strategic buyers might of life again, the torrid market for new introduction of international have added to the competitive investments of recent years has often standards of governance and ways of pressure on the buy-side, but they been reflected in the exit markets too. doing business in order to prepare have been a welcome sight on the In the West, the challenging companies for eventual sale. horizon from an exit perspective. If trading environment has seen a Generating quality exits and corporates present the industry with renewed focus for private equity in returns has always been critical for something of a double-edged sword, getting more closely involved in private equity, but their significance so too does private equity’s own portfolio businesses – while leverage has, if anything, increased as holding ‘internal’ response to the need to both and multiple arbitrage might have periods have been stretched. In put money to work and generate worked in a rising market, come the developed markets, private equity returns – secondary buyouts. While downturn performance improvement firms are starting to bump up against many practitioners themselves remain is the order of the day. Many private the investment hurdles of their fund very aware of the need to provide a equity firms have therefore been cycles which need to be negotiated clear rationale for such deals in order responding by ‘tooling up’ and even before new funds can be raised. to convince investors that they are not establishing more formalised portfolio In some of the more emerging just fuelling an internal market in operations teams to add more strategic markets, the development of the private equity assets, they have insight and even operational resource industry is still at an early stage, but become an established feature of the alongside the financial planning there is again a sense that the developed markets. However, even in insight provided. enthusiasm and promise on the back the more growth-oriented emerging In many of the emerging markets, of which these markets have grown markets they are also gaining economic growth has been less of a now needs to come good in the form significance. concern – GDP growth of seven or of demonstrable returns. eight percent plus might be difficult to imagine in Europe or North America, but markets such as Brazil, India and China have seen sustained growth and continue to drive forward even though the fear of over-heating is an2 Global private equity report 2011
  5. 5. Maintaining a true course through The more forensic approach being Troubled waters perhaps, and onessuch choppy waters was always going taken by institutional investors may which no doubt will see moreto present challenges for investing and bring with it a greater administrative casualties to come, but goodexiting. But churn has also been a burden for private equity firms, but it helmsmanship and a solid crew (and afeature of the fundraising environment can be seen as an integral part of the bit of luck here or there) still leave theas well. Institutional investors have longer-term trajectory of an industry chance to navigate throughthemselves faced considerable that also includes being under the successfully. There is a strong sensechallenges in recent times, not least increasingly watchful eye of the within the industry, whether inwithin their private equity regulators – given added momentum developed or emerging markets, that itprogrammes, which has led to a by the pressures exerted by the macro is a time to focus on the fundamentalssignificant period of reassessing environment, for sure, but something of private equity investing – buildingallocation strategies and the balance that was already well underway. While relationships, getting your hands dirtybetween investing via re-ups (repeat some may worry that the inherent alongside management at the coalface,investments with an existing investee entrepreneurial spirit of the industry is focusing on performancemanager) and identifying new under threat, others will see scrutiny improvement and proving the modelmanagers, potentially in new markets. and regulation as proof of an industry through good exits and good Private equity firms rarely fail and institutionalising as it plays a higher company stewardship. This approachdisappear overnight, but the ability to profile and more significant role in then needs to be effectively andgenerate returns and raise new funds is economies around the world. continuously communicated,the life-support machine that, if Undoubtedly in the West, as more providing a stream of concreteswitched off, will see firms die slowly. high-profile businesses have come examples to educate, and in the moreThere is still a clear sense that there under private equity ownership, developed markets perhaps re-will be winners and losers within the interest from the regulatory educate, an ever-expanding range ofindustry. The Darwinian process at authorities, politicians and the public stakeholders that the private equitywork will undoubtedly ensure the in general has increased markedly, and model does work as a positive catalystlong-term vitality of the industry, but such attention is certainly not always for change and value growth. Withmany also believe that the increased favourable; indeed it sometimes feels overall global economic sentimentintensity this has brought to the as if it has become fashionable to making a shift in the wrong directionselection and monitoring of criticise and blame private equity at during the latter stages of this researchinvestments by LPs will continue to the slightest opportunity, not least project, perhaps even dampeningbe felt by private equity firms around because of the industry’s perceived some of the signs of cautiousthe world for a long time to come. opacity. Elsewhere in the world, the optimism evident throughout this industry has more quickly gone down report, the need to support and a similar path as the desire to promote encourage such catalysts of wealth private equity and growth has creation and economic development – sometimes battled with a lingering a force for growth – is stronger now scepticism about private equity than ever before. practices and a desire to protect a culture of family-owned business. Global private equity report 2011 3
  6. 6. Global picture:Investment activityFIGURE 1: SOURCES OF DEALFLOWPERCENTAGE Western Europe North America Asia Pacific MENA BRICS Global result Corporate divestments 20 15 23 20 8 17 Family/private 31 52 38 60 68 46 Secondary buyouts 47 30 23 20 10 30 Public markets 1 3 13 0 6 4 Other 1 0 3 0 8 3 • Firms in family and private ownership continue to be seen as the principal source of private equity dealflow. • Secondary buyouts are a feature of all markets, but are expected to be particularly prevalent in the developed European arena. • Respondents in the emerging markets of Asia Pac and BRICS have the most varied expectations in terms of deal sources.“With origination you need to be able “Healthcare continues to be a key “Assuming that the economy willto get through every level of the sector and we participate in its modestly improve, and notprocess successfully. You need basic consolidation. Consumer and retail deteriorate, there should be anhygiene factors, some differentiating are very active, driven by large increase in both dealflow andfactors and some compelling factors. domestic demand. Energy and completed deals. There’s a lot of pentOn the hygiene factors, you need infrastructure are other sectors to up seller demand, and a lot of pentmoney, a fair price, good processes watch, and ones where there has up buyer demand, and when thoseand well-oiled due diligence. The been a lot of competition from local two things coincide, deal flowdifferentiators are often linked to the and foreign strategic partners.” increases.”people you have, your international TURKEY survey respondent UNITED STATES survey respondentnetworks, your understanding of thebusiness, your relationship withmanagement and your brand. Thewow factors tend to come down to theindividual leading the deal and themore personal factors.”UNITED KINGDOM survey respondent4 Global private equity report 2011 – Global picture
  7. 7. FIGURE 2: MOST ACTIVE SECTORS “It is significant that the Consumer consumer sector is cited Business services as the most active. This Industrials and manufacturing Healthcare could change if a double TMT dip recession does occur.” Financial services Education STEVE BRADY Natural resources PARTNER, HEAD OF TRANSACTION ADVISORY Energy SERVICES GRANT THORNTON, US Infrastructure Food and agribusiness Real estate and constructionWhile the macro headwinds are still Software and IT servicesblowing around the world, there is asense within the global private equitycommunity of optimism. With caution FIGURE 3: INVESTMENT ACTIVITY BY REGION PERCENTAGEstill the watchword, approaching two-thirds of GPs included within this Western Europe 50 43 7survey nevertheless believe thatinvestment activity will increase over the North America 63 30 7coming year. It has been fashionable to Asia Pacific 66 27 7talk of the rise of the East both insideand outside private equity, and although MENA 62 38 0there’s no doubt that the developedmarkets have suffered most, recent times BRICS 72 22 6have served as a reminder of the Global result 61 33 6interconnectedness and mutual relianceof global markets in the modern era. Increase Stay the same Decrease Globally, the principal impacts of thedownturn have been to raise the spectre • Over 60% expect an increase.of an industry shake-out and to see • Caution is most clearly expressed in Europe, where over 40% expect it to remain at current levels. • BRICS respondents are most positive, driven particularly by respondents in Brazil and India.levels of quality dealflow reduced. Thereaction of the private equity industryhas been to align itself with the bestopportunities, wherever they may be. FIGURE 4: SOURCES OF COMPETITION PERCENTAGEThis flight to quality has resulted,inevitably, in increased levels of Western Europe 47 11 38 0 3 1competition which has also kept prices North America 65 5 30 0 0 0for the best assets high. The strength ofcorporate balance sheets has served to Asia Pacific 46 29 21 0 4 0intensify this competitive environment. MENA 36 30 15 0 15 4 BRICS 40 32 18 5 3 2 Global result 48 20 26 1 4 1 Domestic Foreign/ Trade Public Family Other private international buyers markets offices equity private equity Global private equity report 2011 – Global picture 5
  8. 8. “We’re seeing good private equity dealflow and a strong pipeline. Entrepreneurs and families are coming out of hiding and are looking for finance to support growth.” ARNAUD LIMAL PARTNER, CORPORATE FINANCE GRANT THORNTON, FRANCEFIGURE 5: KEY FACTORS IN IDENTIFYING AND WINNING DEALS The reawakening of the corporateCorporate/entrepreneur networks community, including the restructuringAdvisory relationships of larger businesses, means that theSector expertise traditional channels of private equityLocal presence dealflow, namely family- and privately-Track record/reputation owned businesses and corporatePrice divestments, are expected to remain theValue add proposition dominant sources. However,Access to capital competition within the private equityDeal process management industry itself has helped promote anManagement chemistry environment where secondarySpeed transactions can take hold, with thisStrategic differentiation being an increasingly relevant feature of both the developed and more nascent markets. In this new landscape, everything points to the enhanced importance of networks. In emerging markets, this manifests itself in the need for local presence and an understanding of local business cultures. Whereas in more established markets, rising competition has emphasised the need to self- originate, act fast and develop an angle.“It’s still a very competitive market “The two main sources of deals here “I’d have to say that at this point inand unfortunately that means that are entrepreneur-owned businesses time we are more cautious thanprice matters most when competing who are unable to access debt optimistic about the economy.”for deals. In a hot market, it’s always funding any more, and the public CHINA survey respondentprice and terms, and then the markets which are becomingprobability of close. How strongly you interesting because of the stockcan demonstrate that you can market pricing.”deliver.” HONG KONG survey respondentUNITED STATES survey respondent6 Global private equity report 2011 – Global picture
  9. 9. PortfolioFIGURE 6: AREAS OF HANDS-ON INVOLVEMENT Throughout the downturn, privateStrategic input equity firms around the world haveFinancial planning found themselves having to focus moreHuman resources on working with portfolio businesses inM&A order to help strengthen their positionsOperational input in an adverse climate. While the skillsProfessionalisation might have been honed in firefighting,Governance they are now proving useful whereAccess to networks private equity firms are operating inCost control low-growth environments.Internationalisation Given the low growth in someMentoring markets coupled with the lack of valueExit planning uplift available from leverage or multipleMonitoring arbitrage, many private equity housesSector knowledge stress the importance of performanceManaging banking relationships enhancement as a value driver andAccess to capital highlight their input in a number of keyKudos areas in aiding this. In particular,Innovation strategic input is universally seen as central to the private equity offering. Around the world, the professionalisation of businesses as they develop under institutional ownership is something which private equity players can and do contribute to. Assistance with operational systems, financial planning and human resources are oft-cited benefits that private equity ownership “With the market as challenging as it is at the moment, can bring to companies. adding value is the only way of really unlocking returns. Groups are finding they have to do more and work more closely with their portfolio management teams. Some got caught out before, and now there’s no going back – if you want to generate a return, you have to work for it.” STEVE LUKENS HEAD OF ADVISORY GRANT THORNTON, US Global private equity report 2011 – Global picture 7
  10. 10. “The value we bring is really about FIGURE 7: HANDS-ON PORTFOLIO INVOLVEMENT PERCENTAGEboosting growth initiatives, reinforcingcorporate governance and Western Europe 15 74 11strengthening management teams.” North America 17 73 10SINGAPORE survey respondent Asia Pacific 31 69 0 MENA 36 64 0 BRICS 25 75 0 Global result 22 72 6 The likelihood that portfolio Increase Stay the same Decreasecompanies will be involved in M&Aactivity varies considerably by company FIGURE 8: PORTFOLIO VALUE DRIVERSand GP. However, there is a general PERCENTAGEsense that M&A levels will increase, with Western Europe 17 39 32 3 9this likely to include cross-borderacquisitions. While GPs are mindful of North America 29 49 14 0 8the challenges involved in making M&Awork, and indeed the additional cultural Asia Pacific 36 45 14 0 5and complexity challenges posed by MENA 26 49 17 4 4cross-border deals, factors such asrelatively cheap assets and opportunities BRICS 35 46 13 2 4to rapidly access growing markets areserving to encourage activity. Global result 27 44 20 2 7 A further aspect of portfolio firm Market Performance M&A Financial Multipleprofessionalisation in which private growth improvement growth engineering Arbitrageequity is playing a role is in relation toEnvironmental, Social and Governance(“ESG”). Governance, in particular, is an FIGURE 9: ESG PERCENTAGEarea of GP focus globally, both reflectingthe ‘best practice’ aspect of this approach Western Europe 41 41 13 5as well as a recognition of increasing North America 30 17 17 36pressure from other stakeholders,including LPs and regulators. Asia Pacific 33 42 17 8 MENA 0 33 50 17 BRICS 34 38 22 6 Global result 32 35 20 13 Highly Growing Of some Not relevant relevance relevance relevant8 Global private equity report 2011 – Global picture
  11. 11. ExitFIGURE 10: EXIT ACTIVITYPERCENTAGE Western Europe North America Asia Pacific MENA BRICS Global result Increase 69 53 74 79 50 63 Stay the same 18 40 13 14 36 26 Decrease 13 7 13 7 14 11 • Over 60% of respondents expect to see exit activity increase over the next 12 months.With what was an accelerating The pressure to exit for some is, Inevitably, secondary buyoutspopulation of private equity backed however, matched by the pressure to provoke debate about their pros andbusinesses leading up to the downturn, invest for others, namely those who have cons. However, in those markets wherecoupled with the closing of most viable dry powder to deploy before the end of they are an established feature, they haveexit routes at the peak of the crisis, the agreed investment periods. These push provided the lifeblood of the exit marketprivate equity industry has found itself and pull drivers are the key factors in the in an environment where IPOs havewith rapidly aging portfolios and, with increasing trend towards secondary been very difficult to achieve. Infundraising looming in many cases, a buyout activity in recent times. emerging markets, secondary buyoutsneed to achieve realisations. This is are yet to achieve the same position, butreflected in the fact that approaching are increasingly seen.two-thirds of GPs globally expect to seean increase in exit activity over thecoming year. “Secondary buyouts work well here, “The global financial crisis resulted in but for different reasons. India is a a lengthening of the holding period growth market dominated by minority for portfolio companies and typically expansion investments. As a natural has led to a delay of 1-2 years in the part of this, the businesses backed investment cycle, which has been need larger capital injections as used to fix and repair portfolio they grow and this presents good companies. Now that these two opportunities for financial investors years have passed, portfolio up the scale.” companies are ripe for exit.” INDIA survey respondent SOUTH AFRICA survey respondent Global private equity report 2011 – Global picture 9
  12. 12. FIGURE 11: EXIT ROUTESPERCENTAGE Western Europe North America Asia Pacific MENA BRICS Global result IPOs 1 9 5 16 37 14 Trade sale 54 56 62 68 43 54 Secondary buyout 45 35 33 16 20 32 The other saving grace for private FIGURE 12: AVERAGE RETURNS PERCENTAGEequity firms in realisation mode has beenthe appetite of trade buyers. This Western Europe 35 35 30highlights the positive side of the North America 34 45 21double-edged sword for private equitythat is an acquisitive corporate Asia Pacific 38 23 39community. Given the range of competing factors MENA 29 42 29at play, practitioners find it difficult to BRICS 50 42 8form a certain view as to the direction ofreturns for the industry. On the one Global result 35 38 27hand, high entry prices, continuingglobal macro uncertainty and a shortage Increase Stay the same Decreaseof debt have applied downwardpressure. On the other, improvingconfidence, a buoyant secondary marketand trade appetite keep optimism alive.Despite this, the prevailing view is thatthe coming period will see both winnersand losers and it will be this thatdetermines the shape of the industrygoing forward. “There is optimism that exit activity will increase this year. The nature of private equity is such that investors measure performance against a benchmark and this is how LPs look at the world. GPs are engaged in an ongoing process of understanding what’s important to LPs; ultimately this comes down to getting capital back and churning portfolios.” HARISH HV PARTNER, HEAD OF TRANSACTION ADVISORY SERVICES GRANT THORNTON, INDIA10 Global private equity report 2011 – Global picture
  13. 13. FundraisingFIGURE 13: AREAS OF INCREASING LP DEMANDS For private equity firms heading out toTransparency market, the fundraising environmentPerformance remains testing. Practitioners point toESG the increasingly polarised nature of theFees market in which high performers areCommitment to strategy able to raise, and even quite quickly,Governance while others find it tough. This is linkedKey man to a flight to quality by LPs which hasFund secondary DD seen even some of the most longstandingDifferentiation relationships reassessed.Value drivers Simultaneously, the industry has seenAlignment a clear shift in the balance of the GP–LPDirect competition relationship, with investors increasinglyCo-investment willing to demand more transparencyDealflow and seek demonstrable performance, not least in newer private equity markets that have been sold hard in recent times and now need to prove they can deliver the promised returns. In developed “The fundraising environment is both positive and markets, LPs have sought to find a negative. There are plenty of firms hitting the fundraising collective voice with which to put their jackpot and deservedly so, but equally there are many case. In particular, initiatives such as players who are really struggling. Ultimately, painful as ILPA and the drive for a particular fund’s LPs to hold closed meetings it is for some, it’s probably a good thing for the industry.” without the GP present illustrate the FRANCOISE NOEL-MARQUIS more ‘forensic’ approach now being PARTNER employed. GRANT THORNTON, FRANCE“I think it’s a competitive fundraising “The big problem for the local market “Fundraising is pretty tough. A lot ofenvironment. It’s better than it has is the total lack of returns made. people flooded into the market andbeen but people still have exposure to There just haven’t been enough of there is possibly now a bit of a knee-bad funds. The denominator issue is them and as a result there are some jerk as people fear conditions are toodiminishing, as is the liquidity issue, very poorly-performing funds.” overheated.”but the overhang is still there and VIETNAM survey respondent BRAZIL survey respondentexisting managers are scrapping forre-ups.”UNITED STATES survey respondent Global private equity report 2011 – Global picture 11
  14. 14. “It is harder to raise funds now and “LPs are reducing both their allocations and the number of GPs theywe will continue to see a flight to want to work with. They have learnt a lot in recent times and are morequality. We’re in a situation where the discerning about performance and the way they are treated by GPs. Thesebetter end of town will do well, but the days more than ever, strong performance and transparency are key.”rest will find it very tough. It is the UNITED KINGDOM survey respondentsame highly-selective environment onthe deal side as well, with the lendingbanks definitely having an A list of GPs.”AUSTRALIA survey respondent There are signs of longer-term FIGURE 14: FUTURE FUND SIZE VERSUS PREDECESSOR PERCENTAGEconfidence with many GPs expecting tobe able to raise larger funds in the future. Western Europe 46 51 3This is most notably a feature of North America 50 42 8emerging markets, with evidence of theprocess of fund size inflation having Asia Pacific 83 0 17paused in developed markets. A clear outcome of the changing MENA 61 31 8sentiment in the investor community is BRICS 75 0 25the expectation amongst GPs globallythat there will be a degree of churn Global result 56 36 8within their LP bases. Pressures in thisrespect vary from country to country Larger Same size Smallerand fund to fund, but it is clear thatwhile in some regions the opening up of • Taking fund size as a measure of the likely future size of the industry suggests that emerging market PE firms are confident of future growth.domestic sources of capital is seen as an • Within the developed markets, the picture points more towards a stabilising of the industry size.opportunity, in others the retrenchmentof domestic LPs is forcing GPs to buildincreasingly international investor FIGURE 15: FUNDRAISING ENVIRONMENTrelationships. This is, in effect, leaving PERCENTAGEsome GPs to compete for attention Western Europe 9 11 33 27 20amongst a broader range of peers byconvincing LPs of the attractiveness of North America 4 22 26 41 7their firm and market in an internationalarena. Asia Pacific 0 13 7 47 33 MENA 0 46 31 23 0 BRICS 3 36 22 33 6 Global result 4 24 26 33 13 Very Positive Neutral Negative Very positive Negative12 Global private equity report 2011 – Global picture
  15. 15. Overall market outlookFIGURE 16: KEY CHALLENGES FACING THE PRIVATE EQUITY INDUSTRY With the global economic situation stillMacro economy very much in the balance, macroRegulation economic considerations are regarded asCompetition the greatest challenge currently facingPerformance the private equity industry worldwide.LP sentiment The fallout from the downturn has alsoDeal origination triggered increased attention fromPE perception national regulators seeking to drive morePE HR transparency from financial institutions.Access to debt The inherent opacity of the privatePortfolio issues equity industry has made it a lightningIndustry maturity rod in some instances, givingExiting momentum to a process that had alreadyTax begun on the back of concerns about jobGeo-political factors security and asset stripping as businessesFiscal environment with larger (often politically sensitive)Human resources stakeholder groups came under privateSecondary buyouts equity ownership in some markets. This has added to the challenges faced by the industry, with firms noting the need to educate and sell the benefits of private equity on an ongoing basis.“I think in general the industry has a “The reliance on leverage, and alsoproblem in generating the types of the ability of private equity companiesreturns to justify the asset class. to differentiate themselves bothThere just hasn’t been the present challenges.”performance in recent times. AUSTRALIA survey respondentInstitutional investors are gettingdisillusioned. That’s a problem theindustry needs to work on.”CANADA survey respondent Global private equity report 2011 – Global picture 13
  16. 16. FIGURE 17: AREAS OF RECRUITMENT “One of the biggest PERCENTAGE issues for the industry is Deal doing 37 Portfolio operations 14 one of perception. Every Research 11 time the industry puts its Admin 4 head above the parapet, it IR 4 Legal 1 risks getting it shot off by Other 1 either the press or the N/A 28 Government. I think it’s symptomatic of the fact FIGURE 18: AREAS OF NEW BUSINESS DEVELOPMENT PERCENTAGE that when times are hard, Core business 48 people look to blame Geographic opportunities 17 someone.” Sector opportunities 9 Asset class opportunities 7 MARTIN GODDARD Deal size shift 3 GLOBAL SERVICE LINE LEADER – TRANSACTIONS Independence 1 GRANT THORNTON INTERNATIONAL Privatisations 1 N/A 14 The bulk of the other key challenges GPs that are looking to diversify faced by the industry relate to the need their areas of interest as the global macro to demonstrate performance in today’s trends play out are most likely to look highly competitive environment. Given for similar opportunities within new this backdrop, it is no surprise that the geographies. Wherever the focus, the key focus of, and opportunities pursued common factor is the need for by, private equity firms relate to their communication, whether that be core business. While the drivers are introducing the asset class, re-educating somewhat different in the emerging and stakeholders, or demonstrating the more developed markets, the shared ability to generate returns. outcome is a perceived need to sharpen deal origination and portfolio“The big challenges to the industry all management processes, with many firmsstem from regulatory issues and the being in the process of augmenting theirfact that PE has been lumped teams in these areas. In the maturetogether with the banks and hedge markets, the long-term process offunds. All of the resulting scrutiny is institutionalisation has seen teamsleading to more and more admin – expand in many areas to support largerand that is not value-adding. There is portfolios and fundraising ambitions.massive pressure on resources and Paradoxically, there is a opposingthis will translate into problems for pressure to minimise back office costs.returns. There is also a problem In the emerging markets, the rapidassociated with all the attention on development of private equity hasfees and remuneration. If there is too required GPs to work to ensure thatmuch pressure here we will not be their own development in human capitalable to hire the top people and they terms keeps pace.will simply go to hedge funds.”GERMANY survey respondent14 Global private equity report 2011 – Global picture
  17. 17. Western Europe:Investment activityFIGURE 1: KEY FACTORS IN IDENTIFYING AND WINNING DEALS Confidence in the prospects for dealflowCorporate/entrepreneur networks over the coming year is returning slowlyAdvisory relationships amongst European private equity firmsSector expertise with around half expecting an increase inTrack record/reputation activity. Although this is the lowest levelAccess to capital recorded in any of the key globalDeal process management markets, very few people actually expectPrice to see investment levels decline.Local presence Anticipated sources of dealflow areValue add proposition particularly varied in Europe. However,Management chemistry most strikingly the importance ofSpeed secondary buyouts is higher than in anyStrategic differentiation other market. With dealflow in the region being generally hard won, private equity firms have sought various ways to get ahead of the competition. In the first instance this involves building and consolidating networks both within the corporate and advisory communities. However, whilst track record is still very important, there is also an increased emphasis on building knowledge of markets and the dynamics of individual businesses and their management at an early stage in the process. Ultimately, most deals will go“I believe secondary and tertiary deals “There’s more competition from trade through some form of intermediationwill continue to be very important, buyers, and I expect this to continue and market testing of the price. This isparticularly for larger mid-market to increase. Trade players are getting the case not least because trade buyersdeals. In 2010 the largest proportion more confident, and unless the have returned as a key competitor toof deals above Euro 75m was economy ends up in a double dip, I private equity, and one with deepaccounted for by secondary buyout can’t see this changing – they’ll be pockets for the right asset strategically.activity. Under Euro 75m a lot more out in force. There are lots of privatedeals were primary transactions. The equity houses with money, but thisfact is that we’re seeing corporates can only dwindle over the medium– tobeing less focused on divestiture, but long-term, not increase.”much more acquisitive.” UNITED KINGDOM survey respondentUNITED KINGDOM survey respondent Global private equity report 2011 – Western Europe 15
  18. 18. “It’s a combination of factors, but FIGURE 2: SOURCES OF DEALFLOW PERCENTAGEreally it comes down to yournetworks, increasingly your sector Public markets: 1%knowledge and focus, rigour, Other: 1%discipline and tenacity. Clearly youcan’t discount the value of Secondary buyouts: 47% Corporate divestments: 20%intermediary networks, but GPs arespending a lot more time on non-intermediated deals these days.There will always be auctions, but youwant to try to avoid them if you can, Family/private: 31%or at least make sure you have ahead start.”UNITED KINGDOM survey respondent“Deal sourcing is the same now as it’salways been for us. It’s about being asearly as you can on an asset, and notwaiting for the pitch from banks. It’sabout spending more time withmanagement teams and vendors to FIGURE 3: SOURCES OF COMPETITION PERCENTAGEunderstand the asset before it comesto market, which means you’re more Others: 1%prepared and can move faster.” Family offices: 3%FRANCE survey respondent Trade buyers: 38% Domestic private equity: 47%“The market in Italy is split betweenthose deals that are marketed aboveand below the radar. For the formeryou obviously need to have a strongrelationship with the intermediaries,but these are more commodities. Thereal key in Italy is to have a bignetwork of contacts among theentrepreneurs.”ITALY survey respondent“It will mainly be secondaries. Most Foreign/International private equity: 11%German corporates have completedtheir disposal programmes andentrepreneurs are reluctant to sellassets only to see their money get “Speed is key in deal origination. It is a very competitivesucked into sovereign debt crises!” market and so getting to deals early is crucial. StrongGERMANY survey respondent relationships with intermediaries is a key part of this.” PAR EKENGREN HEAD OF CORPORATE FINANCE GRANT THORNTON, SWEDEN16 Global private equity report 2011 – Western Europe
  19. 19. PortfolioFIGURE 4: AREAS OF HANDS-ON INVOLVEMENT Hands-on involvement with portfolioStrategic input investments has risen to relatively highM&A levels in Europe versus other parts of theHuman resources world and is expected to remain so, withOperational input the key focus of GP efforts typically onFinancial planning strategic input and M&A. AssistanceInternationalisation with financial planning has also beenProfessionalisation significant, with the majority of GPsCost control reporting that debt renewal will not beAccess to networks an issue over the next 12 months.Mentoring European private equity firms areExit planning more cautious regarding portfolioMonitoring prospects than their counterparts inManaging banking relationships other parts of the world, with the macroGovernance economic environment being cited as theInnovation chief driver of sentiment.Sector knowledge “The nature of the value drivers depends on the “Growing market share through innovation is fundamental. The business and what you’re trying to do to it. In some businesses I like are in big markets cases it could be a mixture of multiple arbitrage and with lots of players, some big groups M&A; in others it might be more organic. You need to with lots of legacy systems, and you find someone smaller with an build a growth strategy to suit the individual innovative approach. The majority of company.” deals we do like this would succeed even if the market stayed flat in my MO MERALI PARTNER, HEAD OF PRIVATE EQUITY personal view.” GRANT THORNTON, UK UNITED KINGDOM survey respondent Global private equity report 2011 – Western Europe 17
  20. 20. Portfolio M&A support is seen to be FIGURE 5: PORTFOLIO VALUE DRIVERS PERCENTAGEmore important amongst Europeanprivate equity firms than elsewhere. Inparticular, crossborder M&A is seen as Multiple arbitrage: 9%an increasingly relevant feature. Financial engineering: 3% Market growth: 17%However, with this comes the additionalchallenges of cultural issues and relative M&A growth: 32%complexity. These are perhaps throwninto even sharper relief when Performancetransactions are being considered improvement: 39%beyond European borders in marketssuch as China, which is now on theradar for an increasing number of GPs. FIGURE 6: CHALLENGES TO CROSS BORDER M&A PERCENTAGE Funding constraints 2 Foreign market credibility 2 Different fiscal environment 2 Currency risk 2 Lack of opportunities 7 Parochialism 9 Management team 13“There are massive cultural Lack of PE resource 13differences between China and the Relative complexity 18West. You can’t afford to ignore China Culture 32and you need to understand it as bestyou can. Doing business in China isnot to be taken lightly.”UNITED KINGDOM survey respondent“The benefits of cross-border M&Areally depend on the company – if thecompany is already international,then it is almost business as usual…they will understand what they are “The main thing is to get the right strategic equity story to be developeddoing and there is a good basis of and executed. We are keen to pursue a long-term plan that is signed off bydue diligence to draw upon. If the both the management and ourselves.”company is venturing abroad for the GERMANY survey respondentfirst time or it is the first acquisition,it is more tricky. There is more workto be done with the management “As a whole, and not just in terms of the weak GDP announcementsteam to convince them and us that it recently, the economy is shaky and confidence is low – I just don’t think itis a good thing to do.” feels good.”FRANCE survey respondent UNITED KINGDOM survey respondent18 Global private equity report 2011 – Western Europe
  21. 21. ExitFIGURE 7: EXIT ROUTES Sentiment regarding prospects for thePERCENTAGE exit market are generally positive, with a window of opportunity seen to haveIPOs: 1% opened up over the last year. AroundSecondary buyout: 45% Trade sale: 54% three-quarters of European respondents also expect exit levels to continue to increase over the coming year, which compares favourably with their counterparts elsewhere.“Secondaries are driving the market “The main cons of secondary buyoutsbecause on one side you have people are that they almost always come viawho need to return capital in order to highly contested auctions and arefundraise and on the other you have therefore expensive. On top of that,people who need to deploy capital.” the former owner has normally done a good job with the business makingSWEDEN survey respondent it difficult to see further growth. Sometimes though, it is just a question of fit and it can really work better for the second buyer than the first.” GERMANY survey respondent Global private equity report 2011 – Western Europe 19
  22. 22. The two key drivers of these exittrends are: first, the return of trade “Returns have, fundamentally, been pretty strong. Ifbuyers, which, while increasing the exit markets aren’t great then, by and large, privatecompetition on the buyside, is also equity firms just sit on investments for longer and waitproving a willing source of liquidity forprivate equity assets, and; second, the until they can get value.”pressures being felt by many private KAI BARTELSequity firms in relation to their own SENIOR PARTNER, HEAD OF M&Afundraising cycles and the need to both GRANT THORNTON, GERMANYdeploy capital and demonstrate returns.The IPO window is seen to be veryfirmly shut in Europe, with theconsequence that, in comparison,secondary buyouts have taken on anadded significance. The cocktail of competition andpressure to exit is resulting inconsiderable variation in expectationsfor returns going forward. Thereremains a sense that there will bewinners and losers and that a final shakeout within the industry is still to happen. “I think returns will stay the same in “I think exit levels will increase the short term, but longer term they because of the maturity profile of will decrease. The best performers portfolios at the moment. There have will maintain their high returns, but certainly been some great exits the discrepancy between the best and recently. The challenge is always the worst will increase.” having the patience to allow companies to mature.” FRANCE survey respondent UNITED KINGDOM survey respondent20 Global private equity report 2011 – Western Europe
  23. 23. FundraisingFIGURE 8: AREAS OF INCREASING LP DEMANDS Unsurprisingly, European private equity “We’ve just come off a fundraisingTransparency practitioners continue to regard the and it’s incredibly competitive outESG fundraising environment as tough by there. Pretty much every LP in thePerformance historical standards. With many world is reducing the number of GPPE firm management investing institutions still working relationships they have and will onlyFund secondary DD through their own problems, while they consider re-ups and new relationshipsCommitment to strategy remain positively disposed towards with top-tier managers, so it’s veryDifferentiation private equity, they are having to look very tough.”Co-investment closely at the number and size of theirKey man UNITED KINGDOM survey respondent commitments to the asset class. For GPs, this sentiment means higher levels of LP churn within their “ESG matters are becoming much investor bases as institutions more important. We signed the UN PRI contemplate future funds. GPs are last year and contributed to AFIC’s readying themselves for the prospect of White Paper on ESG. We have a needing to identify a higher proportion dedicated in-house team and are doing of new investors than in the past and the a big appraisal on the subject now. It is likelihood of a stagnation in fund sizes. extremely important for the image of In addition, GPs are reporting a the industry and to satisfy the LPs.” higher degree of LP engagement. A FRANCE survey respondent greater desire amongst investors for transparency and depth of information is the key trend here. While areas such as “LPs are drilling into companies more performance clearly continue to be of than they have in the past – what key importance to LPs, there is also an makes them tick, why we did the increasing focus on ‘new areas’ such as deal, where the key threats are. ESG and the management of the private However, most LPs have 70-80 fund equity firm itself. interests, and they just don’t have time to sit down with every one of their GPs and go through things in such detail.” “It’s very difficult at the moment. But if you look at the past, LP appetite has UNITED KINGDOM survey respondent normally returned 9-12 months after M&A activity has kicked back into gear and liquidity rises. With any luck that will be felt in the next year.” GERMANY survey respondent Global private equity report 2011 – Western Europe 21
  24. 24. Overall market outlookFIGURE 9: KEY CHALLENGES FACING THE PRIVATE EQUITY INDUSTRY Reflecting the underlying positiveMacro economy sentiment with regard to expected dealPerformance and exit activity, private equity firms areLP sentiment building capacity in order to capitaliseRegulation on the opportunities ahead. In particular,PE perception around two-thirds of EuropeanDeal origination respondents are planning to increaseCompetition their head count over the coming year,PE HR with this predominantly being in theAccess to debt core area of front-line deal-doing.Portfolio issues With increased emphasis beingIndustry maturity placed on self-origination strategies andExiting recruitment, it is no surprise that theSecondary buyouts majority of private equity firms stressGeo-political factors the importance of focusing on their core business of identifying quality businesses within their target market. Private equity players are currently faced with a plethora of challenges, some private equity specific, some regulatory, and others reputational. However, the most significant factor relates to the challenges presented by the state of the macro economy. Regulatory matters are high on the agenda of GP concerns, not least the introduction of the AIFMD. This particular initiative is expected not only to lead to higher levels of bureaucracy and increased costs, but also to frustrate the dynamism of the industry by raising“Regulation is terrifying. The mindset “We are working on increasing our barriers to entry for first time managersout there is that what private equity build-up programme for the portfolio and spin-outs.does is terrible. How we combat this I and trying to profit from the fact thatdon’t know. What is certain is that very good companies are strugglingregulation of the industry is going to to raise bank funding and thereforebecome a lot more rigorous.” are turning to growth capital providers for the first time.”UNITED KINGDOM survey respondent SPAIN survey respondent22 Global private equity report 2011 – Western Europe
  25. 25. “We have been through the worst FIGURE 10: IMPACTS OF EU REGULATION PERCENTAGEdownturn since WWII and companieshave demonstrated they have the Bureaucracy 38DNA to survive in a market that gets Costs 20 Barriers to entry 7little support from government. The Capital adequacy rules 7main opportunity is to harness the Fundraising 4strength of those businesses and help Less competition 2them into new markets.” Risk perception 2ITALY survey respondent Transparency 2 N/A 18“You can see that the AIFMDrepresents a challenge, but it will FIGURE 11: AREAS OF NEW BUSINESS DEVELOPMENT PERCENTAGEhelp generate a better understandingof the industry.” Core business 60 Geographical opportunities 16SWEDEN survey respondent Asset class opportunities 7 Sector opportunities 7 Deal size shift 2 N/A 8 “Competition is the biggest issue facing the industry. You can really see the need for consolidation in the market – there are too many players with too “In these difficult economic times, private equity is much committed capital. faced with not only an origination issue, but also Those funds with capital pressure from investors, regulators and the broader still to invest will be public. The industry is therefore being challenged to under pressure, and this visibly prove the model and demonstrate it can add will drive up prices.” value regardless of broader economic conditions.” RAINER WILTS THIERRY DARTUS PARTNER HEAD OF TRANSACTION ADVISORY SERVICES GRANT THORNON, GERMANY GRANT THORNON, FRANCE Global private equity report 2011 – Western Europe 23
  26. 26. North America:Investment activityFIGURE 1: KEY FACTORS IN IDENTIFYING AND WINNING DEALS Price remains king in North America’sCorporate/entrepreneur networks highly intermediated and efficientPrice market and is seen by many as the keySector expertise factor in winning deals. However,Advisory relationships evidence suggests a GP’s sector expertise,Access to capital as well as the quality of its corporateDeal process management networks, are central elements of theirLocal presence approach to deal origination.Value add propositionTrack record reputationManagement chemistrySpeed “I think there are two key areas in terms of deal sources: sponsor-to- sponsor deals will be the biggest area, followed by independent family- owned businesses. For sponsor-to- sponsor, the market’s been so negative that they haven’t been able to sell and so now’s the time. Independent family-owned businesses“I think PE investment activity over the “Origination is sector led. We’re calling may be a driver of deals as there’snext 12 months will be increasing. I on companies in specialist areas where uncertainty around so this may drivestill think there’s lots of dry powder out we’ve invested before and built domain things through.”there and banks are still lending as the knowledge, that’s how we differentiate. UNITED STATES survey respondentdebt markets have softened a bit. The We’re proactive in terms of identifyingeconomy is in good shape in Canada companies we’re interested in andbut it’s all subject to company building up relationships over time, “As it always has been, winning dealsavailability – whether there are several years prior to any investment comes down to who pays the highestcompanies available to buy. Valuations opportunity. By the time an opportunity price. Of course, you need to be inare strong so vendors are getting what does arise, we already know each front of the right intermediaries, butthey’re looking for and generally other, and that provides an advantage.” price is by far the biggestthere’s a willingness to transact.” determinant of success.” UNITED STATES survey respondentCANADA survey respondent CANADA survey respondent24 Global private equity report 2011 – North America